5 Risk Predictions for 2024

Which specific risks should financial risk managers keep a particularly close eye on this year, and what steps can financial institutions take to mitigate these threats?

My son’s recent ice-skating lessons offer a perfect metaphor for managing risks in 2024. The first lesson aspiring skaters learn is how to fall down safely and get back on their feet as quickly as possible.

Falling on the ice is inevitable. Some spills are attributable to the risks taken by the skater; others falls are beyond the skater's control, such as a patch of rough ice or a collision with another skater. Regardless of who is at fault, a skater needs to manage the situation to minimize injury and downtime.

 Cristian deRitis

Effective risk managers follow a similar path, whether they’re, say, managing the stocks in a portfolio, making a credit decision or deciding where to locate a manufacturing facility. Before even thinking about the potential upside of a decision, it’s prudent to consider exit strategies.

At what point, for example, should we cut our losses on a bad investment? How will we mitigate losses if a borrower defaults on a loan? How costly will it be to close and move a factory if it doesn’t produce?

Keeping this scenario planning approach in mind, let’s now consider five key emerging risk trends for 2024:

Inflation decelerated nicely in 2023, faster than most analysts thought possible without a recession. But the fight is not over. Central banks will remain vigilant and will be swift to tighten monetary policy should inflationary forces pick up again – even at the cost of a recession.

As pandemic-era stimulus fades, turmoil in commercial real estate markets, fragilities in the financial system and weakening consumer finances will weigh on global economies in 2024. While the odds of a “soft landing” have increased in the United States and many European nations, economies will remain vulnerable to shocks throughout this transition period.

A growing number of non-financial threats could potentially wreak havoc in 2024. These risks are less understood and face weaker regulation than their financial risk cousins.

Cybersecurity has risen to the top of this list for many risk managers, given the surge in both the number and scope of attacks on private companies and public infrastructure over the past year. What’s more, the reduced cost and increased availability of software used to carry out attacks has increased the number of potential threats from both government and non-government actors exponentially.

Risk managers will devote an increasing share of their attention to geopolitical risks in 2024. The past few years have highlighted the vulnerabilities financial institutions and other companies face due to political tensions throughout the world. Armed conflicts and ongoing border disputes will continue to disrupt trade flows, migration and financial linkages.

Deglobalization and de-risking will be discussed and emphasized on quarterly earnings calls, but companies will continue to find that decoupling is easier said than done. While lower cost regional producers (like Mexico in North America and Vietnam in Asia) will benefit from the relocation of manufacturing facilities, linkages between entrenched trading partners – such as the United States and China – will prove difficult to sever.

Risk managers will be challenged to mitigate supply chain risks while keeping costs low and preserving profit margins.

In 2024, national elections will be held in more than 40 countries – including the U.S., UK, Russia, Ukraine, Taiwan and India. These countries represent more than 40% of the world’s population (as well as a disproportionate share of global GDP), and the results of these elections could significantly reshape the future trajectory of the global economy and political alliances.

Hyper-polarization of political parties threatens gridlock and injects uncertainty into both the regulatory and fiscal outlook. Looming issues of debt, deficits, immigration and trade policy demand immediate attention, but will continue to be papered over as politicians kick the proverbial can down the road. Misinformation campaigns on social media could amplify political unrest and threaten the peaceful transfer of power in several countries.

Even smaller, domestically focused companies could be impacted by election outcomes should isolationist tendencies prevail or should social unrest impede the free movement of goods and services.

Risk managers will be keeping a close watch on election outcomes and drawing up contingency plans accordingly.

The focus on climate risk measurement and mitigation fell out of favor in 2023, as bank crises and inflation presented more immediate threats to financial institutions. In 2024, extreme weather events, including those driven by El Niño, will challenge banks, insurance companies and governments.

Firms will continue to face the fallout from floods, droughts, hurricanes and other climatic events. Heat records, moreover, are likely to be broken once again this year, with consequences for both human health and productivity.

Rising pollution and declining natural resources will crystallize the importance of the climate issue for millions of people, shifting the debate away from long-term temperature targets to the need to address immediate threats.

Parting Thoughts

Resilience will continue to be the mantra repeated across risk departments that need to prepare their firms for any eventuality in 2024. While the broad categories of risk may be known, the nature of specific threats will be difficult to discern in advance – especially given geopolitical tensions that go beyond simple economics.

Given the uncertainty, regulators will continue to emphasize stress testing and scenario planning. In the wake of significant bank failures in the U.S. and Europe in 2023, banks will likely be required to hold more capital and evaluate the potential impact of more downside scenarios on their portfolios – including scenarios describing large interest rate shocks and declines in commercial real estate property prices.

While there is plenty for risk managers to worry about, it is important not to get lost in a doom cycle. Remember, economies fared much better than expected in 2023, despite numerous shocks like surging energy prices and spiking interest rates.

More work needs to be done, but banks, businesses, and many households have improved their balance sheets and are better prepared to deal with financial threats than they were in the past. With a little bit of luck, growth will be slow but steady in 2024.

Cristian deRitis is the Deputy Chief Economist at Moody's Analytics. As the head of model research and development, he specializes in the analysis of current and future economic conditions, consumer credit markets and housing. Before joining Moody's Analytics, he worked for Fannie Mae. In addition to his published research, Cristian is named on two U.S. patents for credit modeling techniques. Cristian is also a co-host on the popular Inside Economics Podcast. He can be reached at cristian.deritis@moodys.com.